Wednesday, December 27, 2006

Controlling Car Insurance Costs - The Big Picture

Car insurance in New York is a highly competitive business. You can't pick up a newspaper, listen to the radio, watch TV, or drive by billboards without being assaulted by cute little lizards with Australian accents, companies urging you to honk, etc... As we all know (or at least think we know) competition is very good for consumers, resulting in lower rates and better service as companies trip over each other trying to win your business.

Or does it really work that way? In theory, it should, and certainly we as agents have experienced rate reductions with our carriers, as well as new programs that have lowered costs a good amount for many people. But in a report by New York City comptroller William C. Thompson Jr., as reported in the Insurance Advocate, an industry trade magazine for the tri-state area, it seems like the competitive process is not working well enough or fast enough to be fair to the end consumer.

Now it would be pretty obvious that Mr. Thompson has a particular 'bias' towards his constituents, the residents of New York City. The city tends to be a difficult place for insurance companies to do business, with a high concentration of values, a lot of traffic congestion, and pockets of massive fraud. Still, his statistics apply to the whole state and present a picture that suggests insurance companies have a long way to go to get to rates that are fair to all.

He points out that in 2005, premiums of $10.5 billion were reported, against losses of $5.1 billion, leading to record profits among auto insurers. (Did you think they were doing all this advertising because they just like us a lot as people?) Those premiums are up 29% since 2000, while losses are down by over 20%!

In fairness, he notes that premiums have dropped somewhat and continue to drop. Insurance companies tend to be very conservative, and they are very careful because one good year does not make for a trend in lower costs. In addition, because of injuries that take a long time to treat, and lawsuits that can take years going through the courts, as well as insurance department rules that cause it to take time to process rate changes, we can't expect rates to change this month based on last month's claims.

Still, five years is a long time, and he makes very valid arguments for lower rates and more scrutiny from regulators and municipalities in trying to get the best rate for the buying public. Insurance is not an optional purchase, it's more like a tax on people, with private companies given the right to collect that tax. In that sort of situation, maybe not totally unlike rail, gas, and electric utilities, it's part of the government's job to make sure that private companies are not taking unfair advantage.

You can view Mr. Thompson's full report at